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Heading for a Lost Decade? By: Dick Morris and Eileen McGann
FrontPageMagazine.com | Tuesday, February 10, 2009

From Nouriel Roubini, the economist who most closely predicted the current mess, comes a warning couched in economic jargon that needs to be deciphered and publicized.

In a column on Forbes.com, Roubini warns that the United States, in its response to the economic crisis, may be following in the disastrous footsteps of Japan - whose sluggish and overly lenient response to a financial crisis led to a decade of economic misery.

In economic jargon, Roubini warns: The "market-friendly, case-by-case approach to the necessary debt reduction of insolvent private non-financial agents - corporate for Japan, households for the US - will be too slow." He calls for an "across-the-board debt reduction" - lest we be condemned to a "systemic debt overhang."

In English, this means that by helping people to stay in homes they can't afford, buy cars beyond their means, pay for college through loans - in short, to acquire goods and services on credit they can't sustain -we are doing them no favors. Instead, we're assuring that debt will "overhang" their lives like a vulture sitting on a branch, inhibiting their buying habits and inhabiting their nightmares.

But if we force an "across-the-board debt reduction" that makes them move out of their overpriced homes, trade in their luxury cars, transfer to state colleges - and, if necessary, escape from under their credit-card debt via bankruptcy, we can eliminate the "overhang" and let them and our nation get on with their lives.

Roubini realizes that this approach is "not politically feasible, at this point, in the US."

But it must become feasible.

Remember, it was kindness that got us into this mess in the first place. It was the willingness of Fannie Mae to buy up mortgages that could never be repaid and the availability of low-interest student, car and home-equity loans that encouraged people to live beyond their means and thus spread this miasma of bad debt over our nation's economy.

And let us also remember how Japan's and Europe's soft-love economic policies served them so ill in the last 30 years.

In Japan, banks that should've failed were allowed to live on. Employees who should have been laid off got lifetime-employment guarantees. Companies that should've gone under were propped up.

But Japan's deficit spending didn't work - all its economic stimulus fell flat. As economist Barry Elias notes, Japan raised its "gross government debt as a percentage of GDP" from 45 percent in 1989 to 170 percent today" with no real effect.

Companies in both Western Europe and the United States faced the opportunity to raise productivity through the new information technologies that became available in the 1990s. In the US, firms were free to fire workers who became redundant as a result of the new computer systems. In Europe, they couldn't. As a result, the US grew rapidly in the last 20 years while Europe stagnated.

The lessons from all of this evidence is that by helping households stay in their homes, cars, colleges and lifestyles through bailouts or stimulus spending, we're killing them with love and consigning the United States to live in the permanent shadow of a debt overhang that will inhibit consumer spending, corporate expansion and economic growth.

Dick Morris is a former adviser to Bill Clinton. Eileen McGann is an attorney and CEO of Vote.com. Together, they collaborate on books, columns and foreign political campaigns. To receive free copies of all of their commentaries, please sign up at dickmorris.com.

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